Friday, May 07, 2010

SUMMARY:- Economic data remains upbeat, but market cannot shake off European issues, talk of criminal suit against GS.- Stocks slump again after yet another new Greek plan rally turns sour.- After retaking the February trendline, NASDAQ and SP500 turn right back down.- Daily volatility still whipsawing the market.- Q1 GDP up 3.2% on the first look, Sentiment improves, Chicago PMI runs higher in contrast to Europe.- New month typically means new money, but is it enough to push stocks up and over the April peaks?

Typical day after a new Greek plan is announced: Stocks slump.

Every time a new Greece plan is announced the stock market rallies on new hope that the world s interventionist minds have solved the problem. The day after, the rest of us take over and the market slumps back. Thursday a new Greece plan is announced and the indices gain well over 1%. Friday reality takes over and the indices lose well over what they gained Thursday.

Not that the US news was bad. The GDP for Q1 showed a 3.2% gain. Not bad, but it was less than the 3.3% expected and the 5.6% that was churned up in Q4 on that inventory build. Inventories were not built up as much in Q1, but the consumer (individual or business) did show up. Consumption rallied 3.6%, and that was the best since Q1 of 2007. Business expenditures and consumption were up 4.1%. Equipment and software jumped 13.4%, so the businesses were definitely out spending in Q1. That is not bad considering that most businesses stack their spending into Q4 in order to make the expenditures in the last possible moment to write them off on their taxes. Interestingly, government spending was down. States made up a big part of that because state spending is way down; they have had to cut back in so many areas. The federal government spending is still high, and that is where all the jobs are. It is a good business if you are in the federal government because a lot of the stimulus money was used to hire people for federal jobs and used to give massive raises. Hire them, make them happy, and then give everyone else raises to keep them happy. The fastest growing sector in the US economy is the federal government. Is that what our founding fathers intended? Of course not. Is that what our current and prior administration want? You bet. A bureaucracy feeds upon itself, and right now the bureaucracy is totally in control of our lives at the state, local, and national levels. But I digress.

The other economic data was not bad either. The Chicago PMI posted a 63.8% gain, better than the 59.9 expected. Michigan Sentiment was better at 72.2% versus 71% expected, and it topped 69.5% from March. Spring has definitely come to Michigan. The economic data was fine in the US, but that was not good enough to overcome the post-new-plan slump. Again, that reality comes back into play and people realize there are serious issues beyond Greece. Consider that Spain's unemployment level is 20%, and Spain is considered in much better shape than Greece. We are in for trouble. By 2015-2020, our debt-to-GDP ratio will be as bad as Greece. I do not even want to think about what will happen then. Moody's has already downgraded Greek debt to junk. What happens when we get there? Is it going to downgrade our debt to junk as well?

The Friday move pushed the indices below the February uptrend lines that they just broke over and recaptured on Thursday. There was the Thursday move back over the trendline and there is the Friday move dumped back rather unceremoniously on some rising NYSE volume. Volume remained high and the moves remained big with SP500 dropping 1.66%. That was kind of a piker compared to NASDAQ that fell just over 2%. Very heavy losses on more heavy volume. Once again, the action whips in the other direction as the day-to-day volatility that has grown over the past three weeks turns even more violent. Steady moves up, and then as a move starts to run out of energy, it starts to get more volatile. When it starts to break down it gets reality volatile, and that is what happened here. That is typical, and when a move runs out of gas or when the selloff starts to bottom, that is what you see. Obviously I think this move has peaked for now and needs a rest. It looked like it might make the recovery on Thursday and go on into next week. It may still do that with new money, but it surely was not the case on Friday. Moreover, the VIX overall was joining the game with a 20% move to the upside on Friday following the Tuesday surge. It sold off Wednesday and Thursday to the 50 day EMA and bounced higher. There was a higher low, and that is something to watch out for. As it did so, the market faded off the high. We will have to see how it develops. I do not want to draw any conclusions about that yet other than the fact that the day-to-day volatility is pounding the market and putting stocks under distribution. The day-to-day volatility combined with the overall VIX volatility is a tough, one-two punch. It is pretty clear that the strong Thursday recovery was not the end-all move for this choppy trade; it did not take us back into nirvana. It recovered the trendline but did not get back over the April peaks. That leaves this coming week with new money likely coming in for the new month. It is a very important week for the current rally off the February low. It will determine a lot with respect to whether this market sells further or can continue the break higher. As of Friday, things looked grim.

OTHER MARKETS.

Dollar. The dollar was down a bit on the session (1.3306 Euros versus 1.3228 Thursday). If the number is higher, that means the dollar fell because it now takes more dollars per Euro. It did fall, but it is not a deadly fall. It is easing back after a nice break higher. It was holding at the 10 day EMA, and there is no heavy selling going on. The dollar is acting as a safe haven for money from around the world. As Europe struggles, the dollar will, of course, be stronger. There is a lot of worry about Europe, and that has bolstered the dollar when it was in a bit of trouble back in early April. It held up just fine and broke to a new high.

Bonds. Bonds are so important right now because they are going through the roof. That does not mean yields. Bonds rates are surging in Europe, Greece, Spain, Italy, and Portugal. Here in the US, bonds are surging and driving rates lower. This week the 2 year Greek bond hit 15% and on Thursday it fell back to 13%. On Friday it was bouncing back up. Yields are high because no one has any confidence in the government. They demand more and more interest in order to compensate the risk they are taking on. Of course no one is buying Greek bonds it is very illiquid. No one wants them, and that is how inflation takes off and hyperinflation kicks in. They have to price these to get someone to buy them, and they take off to the upside. US bonds are rallying, pushing yields lower. Yields made it up almost to 3.8% again this week. They closed at 3.74% on the 10 year Thursday. The 10 year closed at 3.66% on Friday. Money is flying into US bonds for safety. There is a trend break and then an explosion higher. It has taken out a lower high in February, and now it is taking aim on the December peak that started this downtrend. Things should be recovering and US rates should be rising. There is something very, very wrong. Our bonds are flying off the shelves; people are pouring money into them when our economy is supposedly recovering as well as the rest of the economy. Why? This is similar to 2000 when there were drought conditions in the US impacting produce and grain prices. The Fed was worried just about the consumer going crazy. There were serious issues happening that made no sense, and the Fed ended up screwing things up. Things are not making sense now, but I do not know if the Fed is necessarily involved in this. The Fed is trying to keep rates low, but this is not what it intended. It is thinking it will have to start selling some of those assets it bought and raising interest rates. That should have negative impacts on our bond prices. Yet bonds are flying through the roof. The problems in Europe are much worse that people anticipate, and our economic recovery is much too weak to offset that. That is why I am worried. I am still playing the rallies if they give it to us, but I am worried about what the future holds. That is why I talked about buying hard assets yesterday.

Gold. There was a breakout by gold. It has broken out over all the lower highs, lower lows, lower highs, and higher highs. It has cracked them all except the old high, closing sharply higher ($1,180, +11.00). Another strong move by gold. It is not as spectacular as the move that occurred in late 2009, but it has set up a tremendous base. It has consolidated that big run to the upside, and now it is ready to take out the prior high. It will take it on and then take it out and continue to the upside. That dovetails with the bond market showing serious problems in the world economies that no one seems to be paying attention to. These are hand-in-hand right now, and it is somewhat disturbing.

Oil. Oil was up. Not a great day, but not bad ($85.97, +0.80). There was a solid gain. You would think oil would be going down with the dollar higher, with Europe in trouble, and with bonds surging; but people are using some of the hard assets as a hedge against inflation. Not only is money going into gold, it is going into hard assets. With the oil spill in the Gulf of Mexico and the federal government saying it will change its mind about any offshore drilling projects until they figure out what happened with the Transocean rig. It might take weeks or months to fix what is putting 5K gallons of oil in the Gulf of Mexico a day, and that puts upward pressure on oil. At least that makes sense you can see the cause and effect. The bond market and gold market are showing something not so clear. On gold you can say there are inflation worries. When you look at the interest rates surging higher in Greece and other parts of the EU, you can understand that. The bond market is a bit more of an enigma. It tends to be an accurate forecaster, and when it is rallying in the US like that, something is amiss. It behooves us to be careful and watch what is happening.

Breadth. The NASDAQ decliners led 3.4:1 to the downside. On the NYSE, they were a mere 2.7:1 on the downside. NASDAQ was in much worse shape; the growth areas were taking the pounding on Friday. That is somewhat of a problem as well. Growth should be preserving itself, but it is getting beaten about the head and shoulders right now.

Volume. Volume fell on NASDAQ, but it was still high volume at 2.6B and well above average. Volume jumped 12% on the NYSE to almost 1.6B shares. Volume has finally perked up on the NYSE, but it is the wrong kind of volume. Some analysts said it was good to see that volume, but they do not understand what they are talking about. When volume is up when the market is choppy after a long run, it is not good. It means shares are changing hands rapidly.

You have to play what the market is giving. We still have good stocks in good position, and they took some blows on Friday. We will see if they hold up, and if they do not we will get out of them. We were taking downside positions on Friday adding to the ones we already grabbed. You have to go with the flow, and we have already lightened up a lot of positions. We took a lot of positions this week, but we were not loading the boat on any of them. We were just taking partials here and there.

CHARTS

SP500. There was the break over the February uptrend line, and then it gave it right back. There is chop, and it is getting more violent. The volume swelled and now it is becoming more violent. We may not see the indices get back up to the April peaks. There is going to be possibly new money to start the month, and that could bounce them higher. They may do it, but based on the Tuesday through Friday action it looks pretty grim. We have been looking at the January peak as a possible drop for SP500 on an initial test. That is not one that gets too ugly and too deep.

NASDAQ. NASDAQ is showing the same thing. It is right back down below the February trendline. It made a closing low on this consolidation. It has shown the big volume of late, particularly with the violent moves. It has the same kind of pattern SP500 is showing. Maybe it will hold up at the mid-March consolidation, and it most surely will try to pause there. That makes even more sense given that the 50 day EMA has risen to this two-week lateral consolidation level. That is a double layer of ice, but it may not hold its January peak around 2325. That looks like a more important level for it to test.

SP600. SP600 was the leader almost to the downside, dropping 3.3% on Friday. It broke its uptrend line on Friday, and it had not come close to touching it prior to this session. On Friday it did crack through and close on the session low below the February uptrend line. It was not horrific or nearly as bad as the other indices, but it was not good action. The question was whether the SP600 would be able to hold the large cap indices higher or if they would drag the SP600 lower. It looks like the latter is the case, at least through Friday. We will see how it plays out on Monday and Tuesday when new money hits the market for the month. After that, it may be right back down.

SOX. The semiconductors got the snot punched out of them on Friday. It filled the gap earlier in the month, rallied back up to a new high and then rolled over and plunged on Friday. Still above the 50 day EMA and still above the January peak, but SOX is going to be the first to get there. It is always more volatile and is showing it right now. Semiconductors broke into the lead late, and now they are leading to the downside early. They cannot seem to get on track.

LEADERSHIP

Financial. Earlier in the week I talked about how the SP500 would rely upon the financials in order to make a break higher. Indeed, the financials had a nice three-day rally where they pushed SP500 back through that trendline. On Friday there was word out that the Department of Justice was looking at a criminal lawsuit against GS (informally, of course). GS tanked and gapped below this support level. GS is in deep trouble. I am still trying to extract my foot from my rear end from kicking myself for not shorting it on this move to the upside. JPM may turn into a short for us. I am looking at it because it sold off, bounced, and then collapsed. It did manage to hold the 200 EMA on the close, but I think it will continue down. There is plenty of room to the downside to give us a gain there. Not all were bad. WFC is still hanging in there and making a higher low. It is not a pretty pattern that I want to dive into, but not all financials are in the toilet.

Technology. AAPL had a good day on Thursday, but it was back down on Friday. Not the same great move. It set up beautifully and rallied higher. They were talking it out and we will have to see how it holds at this support. It had a gap and it is critical. INTC was one of the leaders with its gap to the upside. It has filled the gap now. This does not mean it is toast; it could still be in decent shape. There might be an ABCD pattern with a strong move higher if it can hold at this gap point. That would be a two-reason play: The gap fill and the ABCD pattern at that point. Maybe something will come of that. we are playing JNPR to the downside. Tech is under a bit of pressure.

Metals. FCX was down on Friday but is holding up well at the 200 day EMA. Maybe it is sold out. Note how it has used this level of support in the past. They say the world economies are built with a copper roof, and we will see about that. We will find out over the next week what FCX's intentions are at the 200 day EMA. MT tried to hold the 200 day EMA, and that was one of the reasons I was watching it. It did not hold it but instead broke through on bigger volume. It looks like it will test down at some important levels. If it holds there, we may get a play to the upside. It depends on how much the market selling dissipates over the next couple of weeks and if it is ready to move up after that. X had a head and shoulder pattern, and it broke sharply lower on Friday. We moved in to the downside.

Retail. Retail is in a bit of trouble, and it has tried to bounce and hold. ANN will have to correct. It has had too good of a move and is coming back to correct on big volume heading toward the 50 day EMA. We will let it get down there and see what it does. No ABCD pattern will set up here because there is not much of a bounce. BBBY is struggling as well. Big volume as it broke the 18 day EMA, and that is something it has not done since back in March. We will see what kind of test we get. Big move, immediately sold back, tried to do it again and immediately sold back on volume. We got out. The casual restaurants are in a lot of trouble. PNRA was a leader. It gapped lower with earnings, and now it broke the 50 day EMA and is heading lower. BWLD had been a move higher. We played it up to the earnings. It did not do the move we wanted to, and we got out ahead of earnings. Look what happened: It collapsed, sold, and gapped lower. The news is not good enough to support the big moves. The attitude has soured on them, and they are getting thrown back down. PII had a big gap higher on earnings and is coming back, but look what it is doing. Everything looks solid with MACD and volume. There is a big surge, there is the ABCD, and it is within the surge point. If it holds at the 18 day EMA and continues back to the upside, that would be a great buy point for a new position. Or if you are not in it, to get in at that point. We will see if it holds. I will be looking for ABCD patterns after this selloff; they form after rallies to the upside. It can be an ABCD to the downside if there will be more serious selling, or it can be an upside ABCD pattern. If we see that, we are looking to move in to the upside when the pattern breaks to the upside as well.

Miscellaneous leaders. SHAW held up well on Friday. RMBS held up well on Friday as well. Even though there were some sectors that were beaten up and their components that were beaten up, there are individual stocks holding up just fine. How long that can last if the selling continues is problematic. You have to watch and see. If they struggle and cannot bounce after breaking a support level and your stop, then you get rid of them as we have been doing.

THE MARKET

MARKET SENTIMENT

The VIX is making a higher low. One of the major tells of the VIX is whether it starts making higher lows and rising as the stock market continues to make higher highs. If that is the case, you are looking for a serious correction bordering on the meltdown scenario. That has not been happening with the VIX during this last run. It has been making lower highs and lower lows. It has finally bottomed, and it made a bit of a higher low this past week. That does not mean we are going in for a crash in this instance. I am getting a bit esoteric on you, but notice how the market is peaking at the same time. The market is supposed to fall as the VIX rises. It would be disturbing if the market continued higher, made a new high and sold off, and at the same time volatility was making higher lows and higher highs. When they are doing the same thing to the upside, that means danger. Run fast or just get your shorts ready (and I am not talking about your boxers.) The VIX is showing that higher low, but that does not mean anything at this juncture unless the market itself reverses and makes a higher low with it. It is acting as it should, and it is spiking as the market gets choppy and starts to sell. Finally the volatility in the VIX is starting to match the day-to-day volatility that has been hampering stocks over the past three to four weeks.

VIX: 22.05; +3.61VXN: 22.06; +3.1VXO: 20.98; +4.04

Put/Call Ratio (CBOE): 1.06; +0.34

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn t have the cash to drive it higher.

Bulls: 54.0%, still rising, up from 53.3%. Getting closer to, but still below the 60% to 65% considered bearish. Many more bulls than in February, but they are not running away with the market and thus the market continues to rally. Not that this is a Green Zone of safety; it is a level that can still spark a selloff as seen early this year. This move started at a low of 35.6% in February, the lowest it has been since July 2009. Over the 35% threshold level below suggesting bullishness. After peaking at 53 on this move the bulls lost some nerve, falling to a new low post- July 2009. Once again bulls peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 18.0%. Up modestly from 17.4% after several weeks of declines. It was a pretty sharp decline in bears, well off the 27.8% level on the high of this leg in February and heading toward the 15% level that is bearish for the market. Over 35% is considered bullish for the market; definitely at the lower end of the scale. Heading back toward the 16%ish on the lows of the leg where it held for several weeks. Peaked near 28% in November, falling short of the 35.6% hit in July 2009. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.

NASDAQ

Stats: -50.73 points (-2.02%) to close at 2461.19Volume: 2.661B (-7.37%)

Up Volume: 538.1M (-1.482B) Down Volume: 2.189B (+1.158B)

A/D and Hi/Lo: Decliners led 3.39 to 1Previous Session: Advancers led 2.83 to 1

There will be a lot of economic data out next week. Earnings are still coming out, but they are starting to wind down somewhat. We are picking up with the data, and it will crescendo with the jobs report on Friday. We start off hot with personal income and spending and the ISM manufacturing index on Monday. Tuesday there will be factory orders. Wednesday will be ISM services, and crude oil inventories. Thursday starts to heat up with the continuing claims and initial claims. That is very hot stuff. Then, of course, the jobs report comes on Friday. Unemployment is expected to stay at 9.7% (contrast that with Spain's 20%). While there is no estimate now, jobs are expected to be positive despite the continued 450K-or-more losses in weekly jobless claims. There is quite a bit of information on the docket for next week in terms of scheduled economic data.

As for the market itself, we will see what new plan comes out for Greece or what stories occur over the weekend. It is the start of a new month, and that traditionally sees money being put to work. That is happened for several months now money coming in early. It may be one or two days, and then we will see if there is any staying power. If there is no change in the mood after some buying perhaps on new money coming in then it will roll back over. Plan on using any bounce to the upside toward the prior April peaks as the chance to unload any struggling upside positions that we still hold. We could use that bounce to take that money off the table, particularly if they get close to the trendline and stall, or if they actually get up to the prior peaks in April and stall out there. I would be happy to see that not necessarily that they stall, but if it gets that high before it stalls. If it is going to anyway, I would be happy to see that because that gives a better chance to unload some upside positions and gives good positioning on downside plays. If there is a test like that that fails, what a great way to enter more SDS or pick up some NASDAQ downside plays (and other plays on individual stocks or ETFs as well).

That is our plan after the Friday action that was so harsh on Friday. I am in the camp that there is a correction coming down toward the January peak, particularly on the SP500. If that is the case, that means we will end up closing out a lot more of our upside positions and playing the downside. That is okay. I have no issues with that; I just want to get the best entry and exit points. I will be watching closely next week to see if this new money pushes the market higher. If so, we can close out some upside positions. We will even close the new ones we just took because there is no gain built into them yet. We just took them because they were saying "buy me."

Sometimes when a market turns, those strong stocks that are coming up and ready to make the break get caught in the crossfire. We have to be ready for that. If we get an upside day, we can use that to our advantage. Then we turn over and look for the downside. Over time we look for the ABCD pattern to form and see if they are upside or downside. We would be looking at some that would be over a two-to-three-week period. What you have for the upside is that strong move, and then it comes back, makes a low, bounces, makes a lower high, and then sells off and makes a lower low. That chases out a lot of owners who think it is going to sell off because it has made a lower high and lower low. As long as it has had a strong move upside, it is still in control and is all contained within that trend. If it holds up with the 60% Fibonacci retracement or that general range, then that shows there is plenty of momentum to continue to the upside. On the downside, you reverse it. There is an impulse move to the downside, it bounces, and it sells off and does not make a lower low. It looks like it makes a higher low and moves up and makes a higher high. It looks like things are okay, and at that point you watch. If it rolls over and starts to sell hard, you have your downside play. We will spot more of those when they form up there are not many out there right now.

I am not too sanguine about the market continuing its rally at this point. Just a lot of issues all stemming back with the high volume that started creeping up as the market was moving laterally. Now this week there have been violent moves in price accompanied by even stronger moves in volume. And, of course, a broken trendline and leaders breaking down in retail and other areas that have been pushing the market to the upside. With that, we are looking for some downside. That is what the market does. We have taken a lot of gain on the upside because I figured this was coming. We will use any bounce early next week to empty out and close up more upside plays, and then we will look to play the downside and make money from it as well. Have a fantastic weekend. Enjoy some of the money you have made and have some fun.

Support and Resistance

NASDAQ: Closed at 2511.92Resistance:

2535 is the April 2010 peak2546 from July 2007, February 2007, November 2007: a level touched many times as a high and low.2725-2730 from the July 2007 and May 2009 peaks

Support:2453 is the August 2008 peak2412-2415 represents a series of peaks and lows in 2007, 2008The 50 day EMA at 24042382-2395 from 20082324-2370 is a range of resistance from early 20082320 to 2326.28 is the January high2319 from the September 2008 peak2292 is a low from January 20082273 to 2282 marks bottom of January 2010 lateral peak2275 C 2278 from the February 2008 and April 2008 lows2245 from July 2008 through 2260 from late 2005. 2210 (from September 2008) to 2212 (the July 2009 closing low)2205 is the November 2009 peak2191 is the October 2009 peakThe 200 day SMA at 21902177 is a low from March 20082169 is the March 2008 closing low (double bottom)2168 is the September 2009, intraday peak2167 from the July 2008 intraday low2155 is the March 2008 intraday low

S&P 500: Closed at 1206.78Resistance:1214 is the first April peak, 1220 is the second high.1240 is the key July 2008 interim low.1293 from a March 2008 low1298 is the November 2008 rebound high that made a lower high. Also part of the Q1 2008 double bottom.

Support:1200 from the July 2008 low1185 from late September 20081181 is the April selloff low1170 is the prior March 2010 highThe 50 day EMA at 11701156 is the Sept 2008 low1151 is the January 2010 peak1133 from a September 2008 intraday lowBottom of the January 2010 consolidation 1131 to 11361119 is the early December intraday high1114 is the November 2009 peak is breaking1106 is the September 2008 low1101 is the October 2009 highThe 200 day SMA at 10891084 to 1080 (September 2009 peak)1078 is the October range low1070 is the late September 2009 peak1044 is the October 2008 intraday high and the February 2010 low

Dow: Closed at 11,167.32Resistance:11,734 from 11-98 peak

Support:11,100 from the 7-08 low10,963 is the July 2008 lowThe 50 day EMA at 10,83510,730 is the January 2010 peak10,609 from the Mid-September 2008 interim low10,496 is the November 2009 high10,365 is the late September 2008 low10,285 is the late December consolidation peakThe 200 day SMA at 10,13210,120 is the October 2009 peak9829 is the September 2008 closing high9918 is the September 2008 peak9855 is the early September peak in its lateral range9835 is the late September 2009 peak

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the Economy section.